Treasuries Slip Ahead of Jobs Report and Possible Tariffs Ruling

U.S. Treasuries slipped on January 8, 2026, as traders positioned for key economic data releases and potential developments regarding new tariff policies. The yield on 10-year Treasury notes briefly exceeded that of two-year notes by more than 72 basis points for the first time since April 2025, reflecting expectations of further Federal Reserve easing. The move followed increased corporate bond issuance, which pressured long-term yields higher.

The market remains focused on the upcoming jobs report for December, scheduled for release this week. The report will provide insight into the health of the labor market and whether the Fed will feel pressure to cut interest rates again. Philadelphia Fed President Anna Paulson recently indicated the Fed may be able to reduce rates if inflation continues to ease, but she emphasized that further cuts are not expected to come immediately.

Tensions over potential tariffs also weigh on the market. President Donald Trump has signaled that he may impose higher tariffs on Indian oil imports if New Delhi does not meet U.S. demands to cut its purchases of Russian crude. At the same time, the Supreme Court is reportedly considering whether to rule on the constitutionality of Trump's tariffs, which could have significant implications for inflation and the Fed's monetary policy path.

Why Did This Happen?

The flattening yield curve reflects growing expectations that the Fed will cut rates this year. While the central bank has already reduced rates three times in the last quarter of 2025, traders remain cautious. Powell's recent comments suggested uncertainty about the need for further easing, as inflation remains above the Fed's 2% target and the economy continues to grow.

Corporate bond issuance is also contributing to the shift. Companies like Meta and Alphabet have raised billions in recent weeks, adding to the supply of debt and pulling capital away from Treasuries. This dynamic has pushed yields higher, particularly for longer-dated maturities, as investors shift to higher-yielding assets.

What Are Analysts Watching Next?

Investors are closely following the December jobs report, which will be released in the coming days. A strong report could delay further rate cuts, while a weaker-than-expected result may reinforce the case for more aggressive easing. Paulson has suggested the Fed's rate path will remain gradual, but she acknowledged that a slowdown in the labor market could create room for additional reductions.

The outcome of the Supreme Court's deliberations on Trump's tariffs is also a key risk factor. If the court rules against the tariffs, it could reduce inflationary pressure and open the door for more Fed easing. However, any reversal of Trump's policies could introduce market volatility, particularly in sectors exposed to global trade.

Meanwhile, the U.S. trade deficit has improved significantly, falling to a 16-year low. This was driven by a decline in imports and a surge in gold purchases, which contributed to a more favorable trade balance. Analysts suggest the trend could support GDP growth in the fourth quarter of 2025.

How Is the Global Market Reacting?

Global markets have shown mixed reactions to the geopolitical developments. Asian equities, including the Nikkei and Kospi indices, advanced, while European markets showed signs of volatility. In Latin America, defense stocks rose on expectations that increased geopolitical tensions could boost demand for military equipment.

The U.S. dollar has strengthened in the wake of the trade deficit improvement and Trump's tariff-related comments. However, uncertainty over the Fed's next moves continues to weigh on the currency, as investors balance expectations of rate cuts against inflation concerns.

What Could Come Next?

The coming week will be critical for market sentiment. The jobs report and any developments in the tariff dispute will likely determine the near-term direction of Treasury yields and equity markets. If inflation shows further signs of slowing, the Fed may feel more confident about cutting rates in the first half of 2026. However, a surprise uptick in wage growth or inflation could delay that outcome.

Corporate bond issuance is expected to remain elevated, which could continue to pressure Treasury yields higher. The Fed's monetary policy will need to balance these dynamics with the need to maintain price stability and economic growth. As the market awaits more clarity, investors are advised to monitor key economic releases and central bank statements for further direction.